A trading strategy that uses an adaptation mechanism based on daily returns profile shows significant outperformance of SPY total return buy and hold since inception.
This is a long-short strategy that employs a moving average that adapts to daily returns to identify and follow trends. Long positions are reversed to short and vice versa so the strategy is always in the market. The strategy is available for sale to professional traders and hedge funds subject to acceptance of a non-disclosure agreement.
The strategy uses an adaptation mechanism that adjusts a fast and a slow moving average (called MADAPT) based on daily returns profile.
Strategy general description
Buy: MADAPT(fast) > MADAPT(slow)
Short: MADAPT(fast) < MADAPT(slow)
Backtest details for strategy
Time-frame: Daily (adjusted data)
Strategy type: Long-short (reverse)
Backtest period: 01/29/1993 – 01/06/2020
Commission per share: $0.01
Position size: Fully invested
Position entry and exit: Open of next bar
Equity, monthly returns and drawdown profile
|Parameter||Strategy||Buy and Hold|
CAGR for the strategy is 12.1% versus 9.7% for total return buy and hold while maximum drawdown is 19.7% for the strategy versus 55.2% for buy and hold. Both long and short sides are profitable. Win rate is nearly 80%.
The strategy backtest shows high returns during 2008 bear market and a potential of providing tail risk hedge assuming no major change in bear market dynamics that will cause unexpected behavior.
Below are results for QQQ (inception to 01/07/2020) with only one parameter adjusted in the adaptation mechanism to account for the higher volatility.
Note that this strategy works well only in markets with extended trends because it is fundamentally a trend-following system.
The strategy is available for sale to professional traders and hedge funds subject to acceptance of a non-disclosure agreement.
Charting and backtesting program: Amibroker
Data provider: Norgate Data
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